Adding More Value with Lean Accounting

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Now that you’ve learned about the benefits that Lean and Six Sigma methodologies can bring to your operations, it’s an opportune time to think about applying these principles to your accounting department. “Lean accounting?” you might ask. When one considers how relatively unchanged most accounting practices and systems have remained for decades, it only makes sense to see what value Lean can deliver when managing your organization’s finances.

There are many reasons for considering shifting to Lean accounting. One the most important is clarifying the data coming from the accounting procedures. As we’ve seen with Lean before, one of the big benefits is “getting everyone on the same page”. Due to the complexity of modern accounting, many executives and decisionmakers often have little understanding of the data flowing from the finance department.

Even more troubling, without aligning accounting with the Lean methodologies being applied elsewhere in the business, the true benefits of waste reductions, elimination of non-value steps, and the greater value delivered to the customer may not be captured or measured accurately. Seeking to define and clarify the goals of Lean accounting, a group of thought leaders at the Lean Accounting Summit in Detroit in 2005 collaborated to set down the principles, practices, and tools of this emerging branch of the Lean movement.

Not surprisingly, the description of the goals and guidelines that emerged were similar to the fundamental principles of Lean itself:

  • Ensure that accounting provides useful information to the Lean transformation within the organization
  • Benefit from the use of Lean tools to eliminate waste from the accounting department
  • Maintain full compliance with GAAP, reporting regulations, and internal reporting requirements
  • Support the Lean culture in place with information that is relevant, actionable, and empowers stakeholders to pursue continuous improvement

Against this backdrop was the assumption that Lean methodologies in place elsewhere in the organization, can also be adapted for use in the accounting practices:

Value Stream Costing: Cost and profitability reporting for use by everyone in the value stream

Target Costing: Useful in guiding and understanding how value is being created for the customer and how to continue to increase value

Visual Management: Carries the use of visualization of data common in Lean to provide at-a-glance summaries of financial and non-financial measurements. Among the display formats used is a “box score analysis.” This easy to implement tool provides a handy performance measurement and can be adapted for displaying a wide variety of data sets.

Making it easier to keep score

As may be inferred, the Lean box score is based on the similar form of visual shorthand used in baseball. Adapted in 1859, from earlier incarnations of displaying game statistics by British ex-pat and Brooklyn sportswriter Henry Chadwick, the box score made it possible for fans to quickly see the number of runs, hits, outs, errors, etc. which had occurred. In Lean organizations, the goal of the box score is to tabulate and display the performance of the value streams; operational results, financial results, and capacity usage.

Box score showing the operational, capacity, and financial outcomes of four different product production and sourcing options. Credit: Brian Maskell, BMA Inc.

In similar fashion, the Lean box score is typically a single page report showing aspects of the value stream. The value is in the aggregation of operational performance measurements and capacity usage alongside a summary of the income statement. The benefits of distributing this condensed overview to the appropriate stakeholders are many:

  • When used as a tool for decision-making, better outcomes are achieved
  • Empowers non-executives to weigh in on decisions due to having access to more understandable data
  • Provides better reporting and control mechanisms helpful to supporting Lean practices
  • Quantifies the degree by which the value stream is being used productively for operational and financial benefits
  • By including a broad range of information (quotes, profitability, sourcing, product rationalization) it helps in the assessment of how effective Lean initiatives are and how to improve the

How important is the box score to the organizations which use it? It’s not an exaggeration to describe it as the primary decision-making method for Lean companies. The insights it provides begin with leadership being freed from making daily decisions based mostly on product cost information. As decisions are made and relevant information is entered into the box score, the true impact of the decision on the value stream can be captured and understood.

Knowing how the decision affects operations, capacity, and profitability makes it a powerful tool to say the least. And because the box score’s financials are real, the expected revenues are available for all to see instead of being hidden in a spreadsheet somewhere. To experience the implementation of a Lean box score within your organization, connect with us for a customized demonstration.